Rolle im Portfolio

The search for higher yield vis-a-vis developed bond markets is the key selling point of emerging market government debt, with those denominated in local currency potentially boosting capital gains via foreign exchange. Investors have also been attracted to EM debt by virtue of its low correlation with traditional (e.g. developed economies) fixed income investments.

The higher expected returns associated with EM debt, are accompanied by a higher risk. Generally speaking, emerging market countries are expected to be less credit worthy than their developed counterparts.

We see this ETF as a yield-enhancing satellite holding to complement lower-risk core developed market fixed income building blocks. This ETF distributes dividends on a semi-annual basis. Foreign exchange considerations will have an impact on the expected income stream. Put another way, investors investing in this fund are taking a tactical bet on emerging market currencies.

The ETF does not discriminate between geographical areas; thus making it an appropriate vehicle for those seeking a broad EM exposure and thus minimise country-specific risks. However, EM countries as a whole carry systemic risk. Historically, investors in EM have tended to withdraw investment indiscriminately at times of stress. Under these circumstances, local-currency EM debt is likely to be hit harder than its USD-denominated equivalent.

This ETF has a duration of 5, which adds a further layer of performance risk ultimately dependant on the monetary policy of each individual nation. This means it is vulnerable to proportionally higher capital losses when local interest rates are raised. The impact on the ETF is mitigated by the fact that no country currently represents more than 10% of total exposure.

Fundamentale Analyse

Historically, EM government debt has been mostly issued in USD or other developed nation currencies to make it more palatable to global investors. Despite this, recent years have seen growth in the issuance of local currency bonds.

Emerging markets (EM) are routinely described as one of the main financial markets success stories of the last two decades. Structural changes to the way these economies are governed have facilitated large capital inflows, in turn leading to a significant shift in international investors’ asset allocation trends. EM exposure is now part and parcel of most investment portfolios, with investors lured by comparatively high returns and a perception of diminished risk.

However, the strong performance of EM government bonds over the past decades took a turn for the worse in 2013 which have continued in 2014, as key EM countries began to show signs of growth slowdown. Furthermore, recent social unrest in countries such as Turkey and Brazil, not to mention the developments in Ukraine and Russia, has served as a reminder to investors that political risk has not disappeared from EM.

In an attempt to protect against potential short-term speculative capital inflows many EM countries have introduced ad-hoc measures, such as minimum investment periods, maximum levels of foreign equity ownership and FDI tax. These additional costs are ultimately borne by the end investor and are often cited as a barrier to entry. Looking forward, further policy moves of this kind cannot be excluded.

In a way, the events since 2013 have exposed one of the key weaknesses of the rationale for investing in EM. The success of most emerging market economies has been predicated on an export-oriented model whereby they became the suppliers of choice to consumption-driven developed partners. As the latter struggled under the burden of public and private debt, EM economies have had little option but to incentivise internal sources of growth. However, in order to fully incentivise local consumption, EM economies may have to develop and/or considerably extend publicly-funded social safety nets. This, for instance, was one of the key reasons behind the social protests in Brazil. Not all EM countries are the same; but any move to provide for extended social programmes (e.g. health, education) may lead to increased government expenditure in the future. This, in turn, could weigh on EM government bond valuations, not least as international investment flows are now being reallocated towards the recovering developing economies.

Indexkonstruktion

The Barclays Emerging Markets Local Currency Liquid Government Bond index measures the performance of the most liquid local-currency debt issued by 18 different emerging market countries. To be eligible for inclusion into the index, bonds must have a minimum outstanding amount of 1bn USD (or local currency equivalent) and at least one year until final maturity. Additionally, the index will exclude any privately placed debt, that is, any debt not publically issued in global and local markets. Barclays uses a capped market capitalisation weighting methodology which limits country exposure to a maximum of 10% and redistributes the excess market value index-wide on a pro rata basis. Emerging market countries include those defined by the IMF and the World Bank. Additional countries that bond investors classify as EM due to factors such as investability concerns, the presence of capital controls, and/or geographic considerations may also be included on the list and are also reviewed on an annual basis. The largest country exposure is Brazil (~10%), Mexico (~10%), South Korea (~10%) and Poland (~9%).

Fondskonstruktion

SPDR uses physical replication to track the performance of the Barclays Emerging Markets Local Currency Liquid Government Index. SPDR uses sampling techniques to achieve this return. Under this arrangement, SPDR attempts to match the return, duration and geographical exposure of the index without necessarily holding all index constituents at the exact weights specified by the index. In practice, the securities held by the fund rarely stray too far from those dictated by the index. Dividend distribution is undertaken semi-annually. The fund does not currently engage in securities lending. The maturity and rating breakdown of the fund’s holdings is reflective of the issuance of local-currency EM debt. Around 50% of holdings fall within the 3-10 year maturity range giving the fund a duration around the five year mark. Over 80% of bonds held by the fund are rated A or Baa.

Gebühren

SPDR levies a total expense ratio (TER) of ETF is 0.55% which is the mid-point of the 0.50-0.60% TER range charged by ETFs offering exposure to the local-currency emerging market government bond market. It should be remembered that there are additional, investor-specific costs associated with trading the ETF, such as bid/offer spreads and brokerage commissions, which should be factored into an investment decision. There are also rebalancing costs whenever the index changes composition.

Alternativen

There are currently three alternative ETFs offering local-currency exposure to emerging market government debt.

The most popular, as measured in AUM terms, is the iShares Emerging Markets Local Government Bond UCITS ETF. This physically replicated ETF charges a lower TER of 0.50% and tracks a different sub-set of the Barclays EM local currency government benchmark, namely the “core” index, which measures the performance of the 15 EM issuers considered as having the most accessible local currency government bond markets. Unlike the reference index, the ‘core’ index excludes the ‘more developed’ emerging countries such as Israel and South Korea.

Further down the AUM scale we find the PIMCO Emerging Markets Advantage Local Currency Bond Source ETF. Also physically replicated, it charges a TER 0.60% and tracks the performance of a PIMCO in-house produced index with two key features: a) it is GDP-weighted, and b) it provides exposure through non-deliverable currency forwards to China and India, which are not part of the Barclays indices.

Another alternative is the Lyxor Emerging Markets Local Currency Bond UCITS ETF (TER of 0.55%). It is physically replicated and tracks the JP Morgan GBI-EM Global Diversified Index, which offers exposure to 12 EM issuers.